Q1. Jon Horton, CFA, is the Chief Financial Officer (CFO) for Springtown Corporation, a manufacturer of windows for residential and

commercial applications. As part of an ongoing diversification strategy, Springtown Corp. has recently entered into a preliminary  

agreement to purchase all of the assets of Prime Doors, a manufacturer and distributor of doors to the same residential and

commercial market in which Springtown sells its windows. Horton is head of the due diligence team that will fully evaluate Prime

Doors’ financial statements prior to the proposed acquisition.

Prime Doors has been in operation for thirty years, and currently has approximately 800 employees at two operating facilities. Horton observes in the notes to the financial statements that Prime Doors has a defined benefit pension plan, for which all employees are eligible. Employees are vested at the rate of 20% per year of employment, and are fully vested upon completion of five years of employment. Springtown does not offer a pension plan to its employees, but encourages employees to contribute to Individual Retirement Accounts (IRAs) and offers a 401(k) program.

Horton wants to fully evaluate the financial implications of Springtown’s assumption of Prime Doors’ pension assets and the associated future liabilities and expenses. Like most companies, the pension plan for Springtown’s employees is not fully funded, but Horton wants to review all assumptions used by Springtown’s accountants in the valuation of the plan’s current liabilities. The most current information regarding the pension plans is as follows:

Horton notices a paragraph in the pension plan footnotes that the original pension plan was amended last year, effectively increasing the level of benefits to be paid to employees with more than ten years of service. However, he is not able to detect what effect, if any, this change in projected benefits has had on Prime Doors’ financial statements or is expected to have in the future.

Horton is aware that a commonly used method can be used to adjust the income statement and provide a better measure of Prime Doors’ economic pension cost than reported pension expense. He is not quite sure which components of the financial statements are utilized to derive an adjusted pension expense, but intends to investigate what analysis he can perform to gain more insight into the company’s position with regards to its pension plan.

When accounting for pension liabilities in the U.S., a company must make fundamental assumptions to estimate the future liability and expense for each employee. How are the following assumptions required to be treated in the pension footnotes?

         Required disclosure                      Not required to be disclosed

A) Discount rate                                      Expected return on plan assets

B) Discount rate                                      Rate of compensation growth

C) Rate of compensation growth         Expected length of employment

Q2. What effect will an increased discount rate and increased expected rate of return have on a company’s projected benefit

    obligation (PBO) and accumulated benefit obligation (ABO) as reflected in the financial statements?

A)   Both will decrease.

B)   Both will increase.

C)   Only one will increase.

答案和详解如下：

Q1. Jon Horton, CFA, is the Chief Financial Officer (CFO) for Springtown Corporation, a manufacturer of windows for residential and

commercial applications. As part of an ongoing diversification strategy, Springtown Corp. has recently entered into a preliminary  

agreement to purchase all of the assets of Prime Doors, a manufacturer and distributor of doors to the same residential and

commercial market in which Springtown sells its windows. Horton is head of the due diligence team that will fully evaluate Prime

Doors’ financial statements prior to the proposed acquisition.

Prime Doors has been in operation for thirty years, and currently has approximately 800 employees at two operating facilities. Horton observes in the notes to the financial statements that Prime Doors has a defined benefit pension plan, for which all employees are eligible. Employees are vested at the rate of 20% per year of employment, and are fully vested upon completion of five years of employment. Springtown does not offer a pension plan to its employees, but encourages employees to contribute to Individual Retirement Accounts (IRAs) and offers a 401(k) program.

Horton wants to fully evaluate the financial implications of Springtown’s assumption of Prime Doors’ pension assets and the associated future liabilities and expenses. Like most companies, the pension plan for Springtown’s employees is not fully funded, but Horton wants to review all assumptions used by Springtown’s accountants in the valuation of the plan’s current liabilities. The most current information regarding the pension plans is as follows:

Horton notices a paragraph in the pension plan footnotes that the original pension plan was amended last year, effectively increasing the level of benefits to be paid to employees with more than ten years of service. However, he is not able to detect what effect, if any, this change in projected benefits has had on Prime Doors’ financial statements or is expected to have in the future.

Horton is aware that a commonly used method can be used to adjust the income statement and provide a better measure of Prime Doors’ economic pension cost than reported pension expense. He is not quite sure which components of the financial statements are utilized to derive an adjusted pension expense, but intends to investigate what analysis he can perform to gain more insight into the company’s position with regards to its pension plan.

When accounting for pension liabilities in the U.S., a company must make fundamental assumptions to estimate the future liability and expense for each employee. How are the following assumptions required to be treated in the pension footnotes?

         Required disclosure                      Not required to be disclosed

A) Discount rate                                      Expected return on plan assets

B) Discount rate                                      Rate of compensation growth

C) Rate of compensation growth         Expected length of employment

Correct answer is C)

A company must disclose the discount rate, the expected return on plan assets, and the rate of compensation growth. The expected length of employment is not a required disclosure.

Q2. What effect will an increased discount rate and increased expected rate of return have on a company’s projected benefit

    obligation (PBO) and accumulated benefit obligation (ABO) as reflected in the financial statements?

A)   Both will decrease.

B)   Both will increase.

C)   Only one will increase.

Correct answer is A)

The use of a higher discount rate will decrease a company’s PBO and ABO because it will result in a lower present value of future pension liability. The expected rate of return has no impact on pension obligations.

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